March 19, 2014

Improper Gulf Oil Spill Payments Undermine Integrity of Justice System

by Harold Kim
Executive Vice President, U.S. Chamber Institute for Legal Reform

We don’t often think about it, but the U.S. justice system is a central underpinning of our society. Whether poor or rich, individual or business, plaintiff or defendant, we all rely on a fair and impartial justice system. But for our system to work, a big dose of good faith is required. When parties don’t act in good faith, the justice system is compromised and we all lose.

That’s what makes the story of BP and the Gulf oil spill settlement so troubling. And why BP’s appeal of this case in federal court to the full Fifth Circuit is critical.

By now, the saga is familiar. In the months following the Deepwater Horizon spill, BP, the operator of the oil rig, agreed to waive the $75 million liability limit under federal law and promised more than 250 times that amount—$20 billion—for cleanup and compensation. The company later agreed to settle outstanding economic and medical claims through a fund supervised by an independent claims administrator.

Unfortunately, soon after his appointment in 2012, the current claims administrator began approving payments for claims with little or no linkage to the spill. Sensing a business opportunity, plaintiffs’ lawyers recruited businesses and individuals to file dozens of these claims, many of which were approved. Some of the most notable payouts include:

  • $23.1 million to an alligator farm located far from the Gulf Coast. The farm earned a profit the year following the oil spill after losses the two years before the spill.
  • $9.7 million to a construction company in northern Alabama. The company has never done any business in the Gulf region.
  • $3.3 million to a law office in central Louisiana located far from the coast.
  • $173,000 to an adult escort service that submitted undated and unsigned financial records.

Whatever one thinks of BP, the fact is that rather than litigating every single lawsuit for decades, this company took responsibility and entered into the largest settlement of its kind in history. And the plaintiffs’ bar looked for a way to game the system, extracting millions of dollars for dubious claims.

Only the courts can correct this injustice. Both U.S. District Court Judge Carl Barbier and a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit have rejected BP’s entreaties to stop the abusive claims. The case is now before the full Fifth Circuit Court of Appeals, which has an opportunity to impose the proper standards on the claims process. The court should do so expeditiously, in order to restore integrity to both the claims process and our system of justice.

How the BP settlement ultimately resolves will answer the multi-billion dollar question: will another company in a similar situation as BP choose the settlement path? Or will they litigate to the bitter end?

If businesses see that the courts effectively sanction a settlement process that undermines good faith and games the system, then the BP settlement experiment will be a failure, and case-by-case litigation may be the only practical path.

Cross-posted from the U.S. Chamber blog.

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